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Elective pass-through entity excise

Massachusetts enacts an entity-level excise that responds to the SALT deduction cap.

Page updated: December 1, 2021

Introduction

On September 30, 2021, the Massachusetts Legislature adopted an elective pass-through entity (PTE) excise in response to the $10,000 cap on the federal state and local tax (SALT) deduction added in the 2017 federal Tax Cuts and Jobs Act.

Massachusetts joins several other states in enacting an entity-level excise that responds to the SALT cap. Under the new legislation, for tax years beginning on or after January 1, 2021, entities taxed as S corporations and partnerships, and certain trusts, may elect annually to be subject to the pass-through entity excise (PTE Excise) at a rate of 5%. The law will expire if the federal SALT deduction limitation expires or is repealed.

Qualified members of an electing PTE are eligible for a credit equal to 90% of a member’s distributive share of PTE Excise paid. To elect the excise, a PTE must file electronically Form 63D-ELT, their income tax return, and all schedules. The PTE Excise must be paid electronically. Taxpayers should consult their tax advisors to determine whether they might benefit from the election.

Frequently Asked Questions

This page will be updated as needed with new frequently asked questions and will include the date of the update for easy reference.

Who is eligible to make an election to pay the PTE Excise under chapter 63D?

Only an eligible pass-through entity can make an election to pay the PTE Excise. “Eligible pass-through entity” is defined as an S corporation under section 1361 of the Internal Revenue Code (Code), a partnership under section 7701 of the Code or a limited liability company that is treated as an S corporation or partnership under those Code sections. In addition, a trust can make the election with respect to income that passes through the trust to beneficiaries that are subject to tax on that income under the Massachusetts personal income tax. Accordingly, the following entities that do business in Massachusetts or have income derived from or connected with Massachusetts sources may elect to be subject to the excise:

  • Partnerships, including limited liability companies that are treated as partnerships for federal income tax purposes, but excluding publicly-traded partnerships;
  • S corporations, including limited liability companies that are treated as S corporations for federal income tax purposes; and
  • Trusts, to the extent that they have income that is taken into account by beneficiaries for Massachusetts personal income tax purposes.

Sole proprietorships and single-member limited liability companies that are disregarded for federal income tax purposes cannot elect to be subject to the PTE Excise because they are not pass-through entities. 

What is a qualified member of an eligible PTE?

A qualified member is a natural person, estate or trust that is subject to the Massachusetts personal income tax and that is a shareholder, partner or beneficiary of an electing PTE. A qualified member may be a resident, nonresident or part-year resident.

Is the PTE Excise Mandatory?

No. The PTE Excise and the related administrative provisions apply to a PTE only if the PTE elects to be subject to the excise. The election is made on an annual basis.

Is the election to pay the PTE Excise revocable?

No. Once the election is made for a particular tax year it is irrevocable for that year, and it is binding on all qualified members of the PTE. 

How and when does an eligible PTE make an election to pay the PTE Excise?

The election is made annually by a PTE on its timely filed Form 3, Form 355S or Form 2, and is confirmed by submitting new Form 63D-ELT. The election may not be made on an amended return. Form 63D-ELT must be filed on or before the due date of the PTE’s tax return, taking into account valid extensions. Once the election is made, it is irrevocable. Qualified members cannot opt out of an election.

What is included in the eligible PTE's income subject to tax under chapter 63D?

Income taxable under Chapter 63D is the sum of the distributive shares of income subject to Massachusetts personal income tax of each qualified member.

How does an electing eligible PTE report the income of nonresident or part-year resident qualified members for purposes of the Massachusetts Schedule K-1?

The electing eligible PTE must report on Schedule K-1 the amount of each qualified member’s distributive share of the PTE Excise paid whether the member is a resident or nonresident of the Commonwealth. The PTE must also provide each qualified member with a Massachusetts Schedule K 1 reporting amounts of PTE income or loss derived from or connected with Massachusetts sources.

Is Form 63D-ELT required to be filed electronically? 

Yes. A PTE that elects to pay the PTE Excise is required to first make the election on its Form 3, Form 355S or Form 2, then file Form 63D-ELT and make tax payments electronically. The filing of Form 63D-ELT and payment of the associated tax may be done through MassTaxConnect. Taxpayers may also file Form 63D-ELT and make payments due with a return using third party software. 

When is Form 63D-ELT due?

The due date depends on the type of PTE that has made the election to pay the PTE Excise. Form 63D-ELT is due at the same time the PTE’s Form 3, Form 355S or Form 2 is due. The Department’s general rules regarding extensions apply to the PTE Excise.

Are estimated payments required for the PTE Excise?

Yes. As with other taxpayers, an electing eligible PTE must make estimated tax payments if the PTE’s required annual payment is $400 or greater. Estimated payments are due for a taxable year even though the chapter 63D election for the taxable year cannot be made until the return is filed. In general, estimated payments for calendar year filers are due on April 15, June 15, September 15, and January 15 (the due dates for fiscal year filers are adjusted based upon their fiscal year). However, given the recent enactment of the PTE legislation, for the taxable year beginning on January 1, 2021 the total amount of all estimated payments for the 2021 taxable year must be made by January 15, 2022.
For future years, a PTE’s required estimated payments will be equal to the lesser of:

  • 80% of the PTE Excise ultimately determined to be due on the PTE’s current year Massachusetts Form 63D-ELT; or
  • 100% of the PTE Excise shown on the PTE’s prior year Massachusetts Form 63D-ELT, if the PTE made the PTE election for the prior year and filed a prior year return that covered a 12-month period.

Will MassTaxConnect accept estimated tax payments prior to December 31, 2021? (Updated 12/1/2021)

Yes, entities can register and make payments on MassTaxConnect as of 11/30/2021.

Can a trust that files Form 2 be an eligible PTE?

Yes, a trust filing Form 2 can be an eligible PTE and make the chapter 63D election if it has income that flows through to its beneficiaries that is reported on MA Schedule 2K-1 for Massachusetts personal income tax purposes.

Can a disregarded entity be an eligible PTE?

No. A disregarded entity cannot be an eligible PTE because it is not a partnership, an S corporation, or a trust for Massachusetts tax purposes.

Is the owner of a disregarded entity eligible to receive the PTE credit? (Updated 11/30/2021)

Yes. A disregarded entity cannot itself receive the PTE credit because a disregarded entity is not a qualified member subject to tax under chapter 62. But the credit is available to an owner of a disregarded entity where the owner would be a qualified member if it held the ownership interest in the PTE directly.

Can a general partnership be an eligible PTE?

Yes, so long as the general partnership also meets the qualifications for the PTE election.

Is a general partnership eligible to receive the PTE credit?

No. A general partnership cannot receive the PTE credit because a general partnership is not a qualified member subject to tax under chapter 62.

Can a single member LLC that is a disregarded entity for federal purposes be an eligible PTE? 

No. A disregarded entity cannot be an eligible PTE because it is not a partnership, an S corporation, or a trust for Massachusetts tax purposes. 

Once the election is made, how is the PTE Excise calculated under chapter 63D? 

Several factors must be taken into account as illustrated by the following simplified example:

  • Partnership ABCD does business in MA with 50% apportionment
  • Partnership net income for 2021 is $1,000
  • Partners A and B are Massachusetts resident individuals
  • Partner C is a nonresident individual
  • Partner D is a resident partnership
  • Each partner is a 25% owner

The PTE Excise would be calculated as follows:

  1. Determine the partners subject to tax in Massachusetts under chapter 62. Here it would be partners A, B and C.
  2. Determine the amount of taxable income allocable to each partner. Partners A and B each have $250 of income ($1,000 x 25%). Partner C has $125 of income. ($1,000 x 25% x 50% apportionment). Total income subject to tax under chapter 62 = $250+$250+$125 = $625. Partner D is not a qualified member and its share of income is not taken into account under the PTE Excise.
  3. Apply 5% PTE Excise rate to such income ($625 x 5% = $31.25).

*Note that in this example no PTE Excise is allocable to Partner D—the upper-tier PTE—regardless of the identity of the partners of Partner D. Its un-apportioned 25% of the $1,000 income flows up to its own Form 3 return. Partner D may make its own election to be subject to the PTE Excise. 

If a PTE makes an election to pay the PTE Excise, the entity’s income is taxed at a rate of 5%, regardless of whether the income is Part A, B or C income under the Massachusetts personal income tax statute. The statutory rates that apply to each class of income must nevertheless, as relevant, be applied on the return of each qualified member. 

Is there a limitation on the use of capital losses to offset other items of income in calculating the PTE Excise under chapter 63D?

Yes. Capital gains and losses must be netted against each other. Net capital gain is included in income subject to the PTE Excise. Net capital losses cannot be used to offset items of income when calculating the excise under chapter 63D. 

Can losses determined under chapter 63D be carried forward?

No. Losses determined under chapter 63D cannot be carried forward by the PTE as there is no provision that allows for such carryforwards in chapter 63D.

What information other than the information shown on the Massachusetts K-1 does the PTE need to calculate the PTE Excise?

It depends. If an eligible PTE has qualified members that are corporations, the PTE needs to know the portion of its income attributable to such corporations because this income is not subject to the PTE Excise. If the PTE has qualified members that are nonresidents, it needs to know its Massachusetts apportionment percentage. Income attributable to nonresidents is subject to the PTE Excise only to the extent that it is apportioned to Massachusetts using the PTE’s Massachusetts apportionment percentage for the tax year. 

How much of a credit is allowed to qualified members for the PTE Excise paid?

A qualified member is eligible for a credit equal to 90% of the member’s apportioned distributive share of the amount of PTE Excise actually paid by the PTE. 

How does a qualified member know the amount of PTE Excise credit to claim? 

A PTE must report the amount of PTE Excise paid at the entity level and the amount of such excise that is allocated to each of its qualified members on Schedule K-1. Qualified members must use the amounts shown on the K-1 in determining their credit, which is their distributive share of the PTE Excise paid. 

In what year may a qualified member claim the PTE credit? 

A qualified member may claim the PTE Excise credit against the member’s personal income tax due under chapter 62 for the taxable year in which the electing eligible PTE’s taxable year ends. For example, where the PTE has a fiscal year ending in March of 2022, a qualified member with a calendar tax year would claim the credit for the PTE Excise on the member’s 2022 tax return.

What happens if the PTE Excise credit exceeds a qualified member’s personal income tax liability? 

The PTE Excise credit is refundable if it is claimed against the personal income tax imposed under chapter 62. Any excess credit is treated as an overpayment. The qualified member may request a refund subject to general refund procedures set out in chapter 62C, § 37. 

If a qualified member of a PTE has made estimated income tax payments for tax year 2021, can such payments be applied to the PTE’s PTE Excise? 

No. Estimated income tax payments for a given tax year, which are made by a qualified member, cannot be applied to the PTE Excise due from the PTE. The burden is on the PTE to pay the excise and such excise is separate from the personal income tax liabilities of its qualified members. See FAQ #10 for more information on estimated payments.

Will PTEs be required to pay both the PTE Excise and PTE withholding tax on the same income in 2021? (Added 11/30/2021)

There is no requirement for duplicative payments under Chapter 63D or in the Massachusetts withholding rules. Entities’ required PTE withholding and members’ required estimated tax payments are determined with regard to the PTE Excise credit available to members. Thus, payments of estimated PTE Excise, which result in the credit, reduce the required amount of PTE withholding or estimated tax. For years after 2021 it should be possible for PTEs and their members to manage their PTE Excise payments, PTE withholding and estimated taxes without substantial duplication of tax on any income.

For 2021 tax years, PTEs may wish to pay the PTE Excise prior to the end of the year to achieve their desired federal tax results. PTE withholding and members’ estimated taxes paid prior to the PTE Excise payment may not be recharacterized or otherwise treated as PTE Excise payments. For a payment to be treated as a payment of PTE Excise it must be specified as such at the time of the payment. Therefore, in order to achieve their desired federal tax results for 2021, PTEs may have to pay PTE Excise on income that was already taken into account in determining prior PTE withholding and members’ estimated tax payments. Any resulting overpayment will be refunded to members or, at a member’s direction, be applied to the next tax year. Note that required 2021 fourth quarter PTE withholding and members’ estimated taxes may be determined taking into account any PTE Excise previously paid for the 2021 tax year.

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